U.S. Securities and Exchange Commission
Litigation Release No. 18146 / May 19, 2003
Securities and Exchange Commission v. Refael Shaoulian, defendant, and Samuel Shaoulian and Rabin Shaoulian, relief defendants, Civ. No. 00-004614 CBM (Manx) (C.D. Calif).
Court Imposes $534,408 of Disgorgement, Prejudgment Interest, and Civil Penalty against Former UCLA Student and Relatives in Internet Stock Manipulation Case.
The Securities and Exchange Commission announced that on May 12, 2003, The Honorable Consuelo B. Marshall, Chief Judge for the United States District Court for the Central District of California, issued a final judgment imposing a total of $534,408.72 in disgorgement, prejudgment interest, and civil penalties against a defendant and two relief defendants in an internet stock manipulation case. Judge Marshall ruled for the Commission after a trial on the issue of monetary relief. In her ruling, Judge Marshall rejected the defendant and relief defendants' arguments that the Court should reduce the amount of any disgorgement award by the amount of income taxes they had paid on their ill-gotten gains and by the decline in the value of the assets in several of their frozen brokerage accounts.
The defendant is Refael Shaoulian, a twenty-six year-old graduate of UCLA. The relief defendants are Samuel Shaoulian and Rabin Shaoulian, Refael Shaoulian's father and brother, respectively.
The Commission had charged in its complaint that while Refael Shaoulian was a student at UCLA he and others had manipulated the prices of five microcap stocks by posting hundreds of false messages about the stocks on internet bulletin boards and chat rooms. The Commission charged that in connection with each of those five stocks, Refael Shaoulian bought shares of the stock; used false screen names and publicly available computers at locations on the campuses of UCLA and other universities to post hundreds of false, favorable messages about the stock on internet bulletin boards and chat rooms, thereby causing the price of the stock to rise; and then sold his shares for a profit. The Commission further charged that in connection with some of the stocks, Refael Shaoulian later sold shares short; posted negative messages about the issuer on the internet; and then covered his short position after the price of the stock had fallen.
The Commission alleged that through this conduct Refael Shaoulian had violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission further alleged that Refael Shaoulian had transferred to his father and brother profits that he had obtained through his fraud. Refael Shaoulian had previously consented to the entry of a permanent injunction against future violations of Exchange Act Section 10(b) and Rule 10b-5.
The case was tried to the Court on the issues of what monetary relief should be imposed against the Shaoulians. The Commission charged that Refael Shaoulian had obtained $410,111.34 of illicit profits through his fraud, and that the Shaoulians had commingled those profits among twenty-one bank and brokerage accounts they controlled. The Commission alleged further that the three Shaoulians had used the profits from Refael Shaoulian's stock manipulations to finance further stock trading and to pay personal and business expenses. The Commission asked the Court to order the Shaoulians jointly and severally to disgorge $410,111.34 of illegal gains together with prejudgment interest, and to impose a civil penalty against Refael Shaoulian.
The defendant and the relief defendants did not contest the amount of profits that Refael Shaoulian had obtained from the conduct at issue. However, they maintained that in the calculation of any disgorgement award they should be given credit for income taxes they had paid on the ill-gotten gains. They also argued that they should be given credit for the amount by which the value of the assets in several of their brokerage accounts had declined after the accounts were frozen by the Court.
Judge Marshall rejected the defendants' arguments. With respect to the decline in the value of their brokerage accounts, the Judge ruled that in a Commission enforcement action the amount to be disgorged by a defendant is the entire amount of the defendant's ill-gotten gains, and that there are no exceptions for situations in which a defendant's assets have declined after a court-ordered asset freeze. As for the defendants' income taxes, Judge Marshall ruled that the use of illegally obtained funds to make expenditures for a defendant is to be counted against the defendant, precisely because he or she benefited from those expenditures.
Judge Marshall ordered the defendant and the two relief defendants jointly and severally to pay $410,111.34 in disgorgement, together with $114,297.38 in prejudgment interest. The Judge additionally ordered Refael Shaoulian, who is unemployed, personally to pay a $10,000 civil penalty.
Contact: John E. Birkenheier, Midwest Regional Office, 312-886-3947.